Hollande Pay Cap Renders French State-Linked Firms Unattractive

By Tara Patel -
Jul 5, 2012

French President Francois Hollande’s
plan to cap pay in the corporate suite of state-held companies
is making them unattractive to both executives and investors.

The Socialist president plans to limit the gross annual pay
of chief executive officers at state-controlled companies such
as Electricite de France SA at 450,000 euros ($565,000), or
about 20 times the salary of the lowest-paid employee. The
measure will be debated in parliament later this year before
taking effect.

“The French state won’t be able to attract and retain the
best talent,” Florence Magne, managing partner at executive
recruiter CTPartners in Paris, said in an interview.

The pay ceiling puts French executives, who already make
less than their European counterparts, even further behind. It
also makes the companies less appealing to investors by showing
the government’s stranglehold on their functioning, said Pierre- Yves Gauthier, head of strategy at Alphavalue SAS in Paris.

“State-owned companies will suffer,” he said. “Quasi-
civil servants will run them and their share price will continue
to trade at a discount because the government has such a heavy
hand in them.”

France’s large state companies have underperformed
benchmark indexes. EDF (EDF), the world’s biggest power producer, has
fallen 37 percent in the past year, while its German rival EON
AG has slid 15 percent. Areva SA (AREVA), the world’s largest nuclear
reactor builder, tumbled 59 percent in Paris in the period,
while the benchmark CAC 40 index declined 19 percent.

‘Patriotic’ Duty

The pay-cap measure is among Hollande’s efforts to bring
“more justice” to France, and comes as he seeks to raise taxes
and reduce spending to meet deficit-cutting targets. The nation
is under pressure to improve finances as concern that Europe’s
economic health is worsening roils markets.

Prime Minister Jean-Marc Ayrault has called on the
“patriotism” of corporate leaders during the debt crisis.

The cap will come with a proposed 75 percent tax on income
of more than 1 million euros, which has raised the possibility
of an exodus of entrepreneurs from France. According to
Christian Babusiaux, a judge at state auditor Cour des Comptes,
tax evasion already costs the state as much as 50 billion euros
annually. The pay cap and the millionaire tax may make corporate
ambition and entrepreneurship a hard sell in France.

“Patriotism isn’t to flee France for tax havens so that
those who stay have to pay,” Ayrault said during his policy
speech on July 3.

‘Proglio Law’

The corporate-pay plan was part of Hollande’s presidential
campaign that pitted him against former President Nicolas Sarkozy, who positioned himself as the business-friendly
candidate in the May 6 election.

EDF CEO Henri Proglio, named in 2009 to the top job at the
Paris-based company, was among a handful of people to celebrate
Sarkozy’s election win in May 2007 at a restaurant on the Champs
Elysees avenue. On Sarkozy’s watch, Proglio’s salary rose 60
percent, compared with his predecessor. Hollande’s proposed pay
plan will result in a 72 percent pay cut for the executive.

More than any French CEO, Proglio, 63, who heads the
biggest nuclear operator with 156,000 employees, has focused the
debate over executive compensation. Hired while still heading
water utility Veolia Environnement SA (ALTEV), the previous government
fought to maintain a comparable salary at EDF for him.

The ensuing political battle gave rise to legislation known
as the “Proglio Law,” which is still under consideration in
parliament, to tighten rules on nominations and pay at state-
controlled entities. The 1.6 million euros Proglio earned last
year is almost four times Hollande’s proposed limit.

International Competition

The new cap also would be about a 10th the amount paid last
year to Johannes Teyssen, CEO of rival German utility EON, and
Fulvio Conti, who heads Italy’s Enel SpA.

Gerard Mestrallet was paid 3.3 million euros last year as
head of France’s gas utility GDF Suez (GSZ) SA in which the state
owns 35 percent.

“Many government-owned companies are competing
internationally and need to be able to pay market rates for
salaries to get good people,” said Magne of CTPartners.

Proglio will be one of as many as two dozen executives,
including at companies such as Areva and La Poste, the national
postal service, who risk being forced to sign up for lower
salaries if the measure goes through parliament later this year.

“It will make their management more difficult,” said
Anne-Marie Idrac, a former minister who sits on the boards of
Total SA, Cie. de Saint-Gobain SA, Bouygues SA and Vallourec SA,
in an interview.

Minister’s View

As ex-head of national railway SNCF, Idrac said she
recruited people with salaries above her own. At EDF, Proglio’s
salary is lower than that paid to about 20 other employees.

CEOs at state-controlled companies making more than the
proposed cap last year include Aeroports de Paris’s Pierre Graff at 736,000 euros, Areva’s Luc Oursel at 679,048 euros and
La Poste’s Jean-Paul Bailly, who was paid 626,174 euros. By
contrast, Frank Appel, CEO of Deutsche Post AG, the region’s
biggest postal service, earned 5.8 million euros last year.

What’s less clear about Hollande’s plan is whether the rule
would apply to top managers at companies like GDF Suez, Air
France-KLM and France Telecom SA, where the state holds stakes.

Meanwhile, Hollande’s pledge to raise the tax rate for
people earning more than 1 million euros a year may drive French
professionals abroad.

‘Dangerous’ Move

“The current economic context means Europe will go
through hard times for the next five or 10 years so a lot of
young people are looking to build their careers abroad where
they can deal with growth and not restructuring,” Magne said.
The proposed higher tax is being “watched carefully,” she said.

While the French government has so far offered few details
about the tax, Laurence Parisot, head of the country’s
employers’ lobby Medef, has warned it would be “dangerous for
keeping and attracting the best” people in France.